Magazine

Corporate Cash: Use It Or Lose It

April 09, 2006

Corporate America is sitting on a huge pile of cash. The nonfinancial companies in the Standard & Poor's (MHP) 500-stock index have amassed a record $637 billion, according to S&P equity analyst Howard Silverblatt. They can deploy that money in numerous ways to the benefit of investors, whether it be acquisitions to improve their growth prospects, share buybacks to raise their earnings per share, or dividends to transfer value directly to shareholders.

But the sheer size of their hoard shows that they've been slow in putting the cash to work. Their biggest fear: making the wrong decisions with their money and raising the ire of shareholders.

They can't sit on the sidelines forever, though. At some point, say analysts, so-called activist hedge funds, which take big positions in companies and agitate for changes, will get involved. Already, hedge fund managers Carl Icahn and Kirk Kerkorian have taken on huge companies -- General Motors Co. (GM) and Time Warner Inc. (TWX), respectively. It's only a matter of time before the activists start flocking to the many money piles dotting Corporate America. "Low interest rates and hefty cash balances are an extremely powerful cocktail for shareholder activism," says Morgan Stanley's (MWD) chief U.S. equity strategist, Henry McVey. "I'm not arguing that management should spend the money willy-nilly, but we're coming out of a multiyear funk where investors are waking up and saying, 'wait a minute, there's great growth [potential] out there."'

The accompanying table shows the companies in the S&P 500 with the most cash on their books as a percentage of their total market value. Note the healthy dollop of technology companies on the list. Nicholas Colas, director of research at Rochdale Securities LLC and a former analyst at hedge fund SAC Capital Advisors LLC, explains that tech companies' cash balances are typically greater than those of the average S&P company by a factor of three. But while "there's a constant challenge to keep investing that cash intelligently," he says, "they've got to start doing something with that money." Before long, they may have no choice.